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Price discovery in the options markets: An application of put‐call parity
Author(s) -
Hsieh WenLiang G.,
Lee ChinShen,
Yuan ShuFang
Publication year - 2008
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20302
Subject(s) - price discovery , futures contract , economics , spot contract , econometrics , financial economics , volatility (finance) , index (typography) , normal backwardation , implied volatility , computer science , world wide web
This study investigates the relative rate of price discovery in Taiwan between index futures and index options, proposing a put‐call parity (PCP) approach to recover the spot index embedded in the options premiums. The PCP approach offers the benefits of reducing model risk and alleviating the burden of volatility estimation. Consistent with the trading‐cost hypothesis, a dominant tendency is found for futures and a subordinate but non‐trivial price discovery from options. The relative weight of options price discovery is sensitive to the methodology employed as the means of inferring the option‐implicit spot price. The empirical evidence suggests that the information contained in the PCP‐implied spot encompasses that provided by the Black‐Scholes‐implied spot. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:354– 375, 2008